Environmental risk and optimum rate of oil recovery

This paper presents a mathematical programming model for optimal rate of oil recovery when a firm faces potential environmental costs. Environmental impacts of applying enhanced oil recovery projects have been recorded as risks of water contamination, air quality degradation and chemical hazards. The dynamic stochastic model in this paper maximizes the expected present value of net returns from the oil reserves and provides a time path for oil recovery projects. This model has been applied to 100 oil recovery projects in the state of Wyoming to determine, first, the optimal rate of oil recovery, and, second, the cost and benefit analysis of these projects given risk of groundwater contamination. The result is that including environmental costs in the model alters the time path and the optimal rate of oil recovery relative to an engineering cost and benefit analysis.